Notes From The Berkshire Hathaway 50th Anniversary Meeting

OMAHA, May 3 — It was a generally mild morning for the Berkville at 50 gala except for oddly threatening flashes of lightning over the insane lines that stretched all around the Century Link Center by 6:30 a.m.

By 7, when the doors open, they had doubled back on themselves and taken up the opposite sidewalks on adjoining streets. Those who thought they could saunter in around 8 a.m. to catch the movie at 8:30 were hit twice — by a drenching cloudburst and, wandering around vacantly in soaked shirts, a full house.

Although the building has been full in recent years, there was generally a sense of decorum about finding seats. Woodstock is supposed to be a metaphor. If you were there when the doors opened, you could afford to be leisurely. This was more like Black Friday at Best Buy. A couple from Malaysia standing behind me in line had flown 30 hours to attend the meeting and will fly 30 hours home tomorrow. All the seats were taken, all the overflow rooms in the building were filled, and extra overflow rooms in the Hilton across the street were also full. Buffett apologized after lunch to those who had to wait for the usual lunch defectors to find seats.

I am pleased to say they ditched the “YMCA” number in favor of rewrites of “Sgt. Pepper’s Lonely Hearts Club Band” and “With a Little Help From My Friends,” which are almost as old as the partnership they were celebrating (released in ’67). There was a bit about Charlie Munger’s infatuation with Hollywood in which he said, “Slick, yo.” There were appearances by Jamie Lee Curtis (in bed), Arnold Schwarzenegger, Little Richard and, of course, the Breaking Bad guy. They showed Buffett acting as a salesman for Borsheims last year convincing a couple to look at a ring that turned into an arranged proposal. There was a bit from the Ellen Degeneres show in which she had one of her people pretend to be a See’s Candy salesperson and do weird stuff. Acme Brick apparently set up a lot of bricks as dominoes for some reason. They dubbed in “Geico” for “plastics” in the famous scene from The Graduate. Buffett did his version of “I’d like to teach the world to sing” with a ukulele.

The big bit in the movie was a tale about Buffett taking on Floyd Mayweather for the welterweight championship. Director John Landis (Animal House, Trading Places, Blues Brothers) wrote and directed. It was fairly clever; Buffett and Mayweather being restrained from going after each other at the weigh-in, interspersed training scenes of Mayweather on the light bag and Buffett using an ancient adding machine at high speed. Buffett wears his glasses (and a white T-shirt) to the fight, apparently on the theory nobody hits a guy in glasses. Just as it’s about to begin, the cable goes out.

Following the rewritten Sgt. Pepper’s and Little Help From My Friends, which were accompanied by spotlights wandering over the crowd illuminating glitter confetti falling from the ceiling, Warren and Charlie emerged at 9 to the strains of Joe Cocker’s cover of Help From My Friends. They got a mostly standing ovation.

“I’m Warren,” Warren said. “This is Charlie. He can hear. I can see. We work together.” He introduced John Landis, who was there.

Carol Loomis took a little of the air out of the self-congratulatory balloon by choosing as her first question an indictment from a Texas shareholder who wrote that he’d always considered Berkshire Hathaway an ethical company, but was no longer so sure after reading the Seattle Times piece on Clayton Homes last month . . .

. . . and following Berkshire’s new bff relationship to 3G Capital, which he described as doing “brutal takeovers.”

Buffett was prepared for the Clayton Homes question, although he insisted the ready availability of slides to aid his argument was not because he knew it would be the subject of Loomis’s question but only because he knew it would come up at some point. He went to considerable lengths to demonstrate that the reporter had confused gross margins with net margins, but didn’t address many of the other complaints specifically. He said 3 percent of Clayton mortgages default, and that most people find it a good way to own a home on a modest income.

“I make no apologies whatsoever about Clayton’s lending terms,” he said. “I’m proud of the Clayton management.”

Added Munger: “We can’t make lending to poor people for houses completely successful.”

On 3G, Buffett said no Berkshire Hathaway company has a policy of employing more people than it needs. Munger found in the question a presumed paean to socialist economics and an opportunity to recount his quote about the Russian economy: “They pretend to pay us and we pretend to work.”

“I really tip my cap to what the 3G people have done,” said the cap-less Buffett, borrowing the most overused cliche in sports.

I missed the next question as a police officer came to the section where I was sitting in the balcony and loudly ordered the overflow sitting on the steps to clear out. Some were Japanese who may not have understood him, but that only made him louder.

Judging by the answer, it had to do with Berkshire’s purchase last fall of the Van Tuyl Group of auto dealerships, and in particular what they thought of dealers trying to eliminate haggling and set fixed prices.

“People seem to want to negotiate,” said Buffett, expressing skepticism that the traditional model of car-buying is going to change in a big way anytime soon.

I found this interesting mainly because the fixed-price model in used cars is what convinced Buffett emulator Tom Gayner to invest in CarMax for Markel, a very successful play.

As always, there were a lot of people who wanted to be told how to be successful. Someone asked for five characteristics of a company that would permit him to project earnings growth for 10 years. Buffett turned to Munger.

“No one size fits all,” Munger said. “They’re all different. We can’t give you a formula that will help you.”

The next question was directed at Munger, wanting to know if he saw the IBM investment as similar to investing in the textile business back when it all began and whether he tried to talk Buffett out of it.

“The answer is no,” Munger said. “I think IBM is a very creditable company. We own a lot of companies that have had temporary reversals.”

“When we bought it, it was a 2-0 vote,” Buffett said.

This also allowed Buffett to make his well-worn point that people should want the price of securities they like to go down, not up, so they can buy more.

“Warren, if people weren’t so often wrong, we wouldn’t be so rich,” Munger said.

Someone cited Munger’s letter in the annual report and wondered why he thought Buffett would be unlikely to replicate his early success in insurance if he had it to do over. Buffett agreed, saying three very lucky things happened to him early, including Ajit Jain walking in the door looking for work, that would be unlikely to happen in a replay. “You couldn’t expect to have three lucky events happen.”

The first succession question didn’t come until at least an hour in, this one on how shareholders should assess the Berkshire Hathaway culture once Warren and Charlie are gone.

“When you have 97 percent of shareholders vote and say, ‘We don’t want a dividend,’ I don’t think there’s another company like that in the world,” Buffett said. “It’s self-reinforcing, and I think it’s a virtual certainty to continue . . . for decades and decades to come. Culture is everything at Berkshire.”

Then he talked a little about his experience running Salomon Brothers. “It would be hard to turn Salomon into Berkshire,” he said.

“I don’t think anybody’s ever done it on Wall Street,” Munger said.

There was a question about Berkshire Hathaway being long sugar through investments in See’s, Dairy Queen, Heinz and Coke and whether that was still wise given an increasing focus on the health hazards. No answer all day dated Buffett more than this one. He acknowledged the trend that Andrew Ross Sorkin had described, then basically dismissed it.

“In the last 30 years, one quarter of all the calories I’ve consumed have come from Coca-Cola,” he said with delight. “If I’d been eating broccoli or Brussels sprouts, I don’t think I’d live as long . . . It’s like going to jail.” He said he likes Coke better than whatever they’ll sell you to drink at Whole Foods.

He also said he doesn’t see anybody smiling at Whole Foods. Since I’m guessing he’s rarely if ever been in a Whole Foods store, this seemed emblematic of his departure from empiricism on this topic. He likes what he likes and he’s lived a long time eating the way he eats and he’s not changing now.

Sugar, Munger added, “prevents premature softening of the arteries.” If it causes him to die a little earlier then he would have otherwise, he’ll miss a few months in a nursing home.

Somebody asked about building scale in the auto dealership business. Buffett said scale doesn’t much matter in cars because local dealers develop local reputations, so it’s all about the quality of the dealerships you own.

Somebody asked about the characteristics he considered 45 years ago in building a company culture.

“Just like your child sees what you do rather than what you say, it’s the same way in a business,” he said. His rule is to work with people as if their positions were reversed and treat them the way he would want to be treated.

Somebody mentioned two metrics of market valuation Buffett has cited in the past — the ratio of total market cap to U.S. GNP and the ratio of corporate profits to U.S. GNP — and pointed out both make the market look overvalued here. Total market cap to GNP is about where it was in 1999, shortly before the dotcom bubble burst (125 percent, more or less) and corporate profits now equal about 10.5 percent, compared to the range Buffett called normal of 4-6.5.

“What it indicates is American business has done wonderfully well over the last number of years,” Buffett said. He attributed them largely to low interest rates. “The question is how long those are going to prevail.” If interest rates return to historically normal levels, stock prices will look high, he said. If they stay low, stock prices will look cheap.

Munger: “Since we failed to predict what exists now, why would anybody ask us to predict what’s going to happen in the future?”

Buffett: “We think any company that has an economist certainly has one employee too many.”

There was a question about new tank car rules. Buffett replied they came out two days ago and consist of 300 pages, so he hasn’t read them yet. He and Munger both said BNSF and all the big outfits have a lot of engineers working on safety. Then Buffett said something reassuring if you were afraid all this 50th anniversary stuff was beginning to sound like a swan song:

“I may write about this next year in the report,” referring to Burlington Northern’s safety record.

Somebody asked how you get to meet important people if you don’t have the good fortune to have a lot of rich business school classmates.

“I think you should do the best you can playing the hand you’re dealt,” Munger said without sympathy. “I never had any business school training. Why should you have any?”

Buffett gave the questioner a second chance and he asked about the dollar as a reserve currency. Munger said he likes it better when we print money to build infrastructure than when we print money to spread around with a helicopter.

Somebody asked about Buffett’s recent willingness to brand subs with the BH name, citing Berkshire Hathaway Automotive Group, which is what Van Tuyl is becoming. The answer was basically brand names that have value won’t change. “We’d be crazy to call it Berkshire Hathaway peanut brittle instead of See’s,” Charlie said. “We have some brands that are worth a lot of money.”

Someone asked if distributed energy and Elon Musk’s new battery for the home threaten to disrupt the utility business model. “People who have adopted solar in our territories are minuscule,” Buffett said.

Munger: “It’s not a threat, it’s a huge benefit to humanity and I think it’ll be a huge benefit to Berkshire. There’ll be some disruption in the utility industry, but I think there’ll be more opportunity than disruption.” Greg Abel agreed and cited some big numbers BH Energy is devoting to renewables, particularly wind.

Someone wanted to know about Buffett’s most memorable failure, so he told the Dexter story again, saying the stock he paid for it is worth $6 billion or $7 billion now. “Nobody misled me on that. I just looked at it and came up with the wrong answer.”

He added another familiar refrain that the biggest mistakes have probably been missed opportunities because he’s never willing to take risks that might endanger the net worth of his partners, his shareholders. They could have used more leverage, he said, leading to this exchange:

Munger: “But we would have been sweating at night. It’s crazy to sweat at night.”

Buffett: “Over financial things.”

Munger: “Over financial things.”

Buffett: “Well, we won’t pursue that.”

They were asked for the thousandth time about the Fed, and Buffett repeated his general bafflement that its easy money policy hasn’t produced any noticeable inflation. “I think we’re operating in a world that Charlie and I don’t understand very well.”

The cash hoard is about $60 billion. “We will be very willing to act if economic turbulence occurs, and we’ll be prepared and a lot of people won’t be.”

Munger: “We just keep swimming and let the tide take care of itself.”

The problem with making macro predictions, Munger added, is you start thinking you know something about it.

Somebody asked if a $37 billion difference between cash taxes and reported taxes is as good as float. Buffett said deferred taxes now amount to about $60 billion, including unrealized gains in the stock portfolio, but he doesn’t see them the same way as he sees float. “Float is a tremendous asset,” he said. “The deferred tax liability is a plus, but it’s not a big asset.”

Somebody asked about Henry Singleton and Teledyne, which opened the door for Charlie, who knew him, to say he was much smarter than Buffett but not as good as investor because he was so busy doing other things.

Buffett: “When people get their ego involved, people do things they normally wouldn’t do. You really should understand human behavior if you’re going to run a business.”

Then he went into all the bad stuff managers have done trying to please a CEO who set profit goals or revenue goals or whatever.

“You really have to be very careful in the messages you send as a CEO,” Buffett said.

Someone wanted to know what it would mean to Berkshire Hathaway if its reinsurance operation were designated as too big to fail. Buffett went into some detail on Systemically Important Financial Institutions, mentioned that GE, Prudential and Metropolitan have been designated in addition to the big banks, and said it basically takes 85 percent of revenues coming from the financial side. At Berkshire, it’s about 20. “We have no reason to think Berkshire Hathaway would be designated as a SIFI,” Buffett said.

Somebody asked about Todd and Ted. “I think the whole thing is working pretty well,” Munger said. “Each one has helped to buy a business recently.”

Buffett said the key factors in people he wants around him are qualities of character, not expertise.

“Charlie and I have run into more dysfunctional people with 160 IQs than most people, probably . . . A lot of people are incapable of functioning well day after day even though they’re capable of brilliance from time to time.”

I missed the last half-hour of the morning session to go downstairs and get the 50th anniversary book before they ran out. Just browsing it is fun. Much of it is original documents reproduced — letters, newspaper clippings, etc. I’m looking forward to poring over it in more detail, but it’s a nice historical document and with only 15,000 copies printed, maybe it’ll be worth something one day. Bought one for my son just in case.

Got back just in time for Buffett’s update on his market vs. hedge funds bet, now seven years old. Even after a rough start in 2008, market: 63.5 percent; fund of hedge funds: 19 percent. With their fees, he pointed out, the hedge funds have done well; it’s their investors who have paid the price of their underperformance.

Passed on the box lunch this year and ate tacos. Pretty good tacos.

First question after lunch was about which businesses thrive in an inflationary environment and which suffer. Buffett said the best are businesses that don’t require continued capital investment; mentioned real estate. Utilities and railroads are the opposite; lots of continuing capital investment. “A brand is a wonderful thing to own during inflation,” he said, citing See’s. He mentioned that Gillette paid $100,000 in 1939 for the radio rights to the World Series (Yankees 4-0 sweep over the Reds) and that investment paid off throughout the lives of the kids who listened to it, even as the cost of those rights multiplied many times.

Munger: “If it weren’t for Weimar inflation, we might not have had Hitler . . . We don’t want inflation because it’s good for See’s Candies.”

Someone wanted to know if Buffett might rekindle his interest in buying a big commercial insurance operation now that he’s started his own.

“It’s almost certain we will not take over a big commercial insurance company,” Buffett said.

Munger: “Well, I certainly agree with you.”

Buffett: “That’s how he keeps his job.”

This is when Buffett apologized to those who had been unable to find anywhere to watch the meeting in the morning. Then he raised his glass. “This is pineapple juice, incidentally. People were wondering . . . ”

Munger was asked about his discussion of reputation in the annual report. “Hardly anything is more important than behaving well as you go through life,” he said.

Someone noted that Buffett has said climate change has no effect on Berkshire Hathaway insurance pricing, but that other companies, including Travelers, list it as an insurance risk.

Buffett said it might be different if you asked about the next 50 years, but pricing insurance on an annual basis, “I see nothing that tells me on a yearly basis that global warming should make me change my prices a lot. That doesn’t mean it’s not a threat to humanity . . . It does not change the situation in a material way in a one-year period, in my judgment.”

Munger; “I don’t think it’s totally clear . . . I think there’s a lot of guesswork in that field . . . It’s not that global warming isn’t happening, it’s just that you can get so crazy excited about it that you make all kinds of crazy extrapolations that might not be correct.”

Somebody asked about investments in oil and gas companies that haven’t gone that well — ConocoPhillips, Exxon — and wondered if Berkshire Hathaway wouldn’t be better off sticking to BH Energy.

“That’s not the oil and gas business,” Buffett said. “We have not distinguished ourselves at all in the oil and gas field.” But he also said he probably hasn’t bought his last oil and gas stock.

Munger on Exxon, given its dividend and interest rates at the time: “It was not a bad cash substitute.”

“Well, it takes 218 members of the House and 51 U.S. senators and a president that will sign the bill,” Buffett said. Despite all their complaints about the corporate tax rate, corporate profitability has never been better, he pointed out. Corporate taxes now represent about 2 percent of GDP compared to 4 percent years ago, while the proportion of individual taxes has increased. “We operated with corporate rates at 52 percent and then at 48 percent and we did pretty well . . . I don’t shed any tears for American business as far as the tax rate.”

Charlie went off on California for its 13 percent capital gains tax, calling it much dumber than Florida. “The idea of driving the rich people out . . . it is really demented.”

Anyway, said Buffett, there’s a chance Orrin Hatch and Ron Wyden will make a deal on corporate tax reform privately, which is the only way a deal can be done. He ruminated on what would have happened at the Constitutional Convention in Philadelphia if the delegates had been running out to give TV interviews after every debate.

Somebody asked about Adam Smith’s The Wealth of Nations, the one non-Ben Graham book Buffett has cited as deeply influential to him.

Munger: “Adam Smith is one of those guys that has really worn well . . . The productive power of the capitalist system is simply unbelievable.”

Somebody suggested that former public companies taken over by Berkshire Hathaway have a harder time than former private companies thinking long term rather than year to year. “I don’t know where he gets the idea,” Munger said. “It’s not apparent to us.”

“I don’t really agree with the premise,” Buffett said.

This began a series of foreigners asking about their countries, which became the end of the line for me. It’s a little like local reporters when they get an audience with the President and ask him what he’s going to do for Buffalo.

Yes, they like Germany, as they demonstrated by buying a small motorcycle equipment retailer in February. “I would really be surprised if we don’t make another deal in Germany in the next five years,” Buffett said.

Somebody wrote in that he and his wife are in their 70s, have clean driving records, but didn’t get a quote from Geico that improved upon the rates they pay now. Buffett said about 40 percent of customers get a better rate with Geico, which means they have a lot of market to conquer considering they represent about 11 percent share today. “It’s definitely worth 15 minutes to call Geico.”

Munger said when you get old and “you find you’re not deteriorating as fast as your contemporaries, you may be paying an unfair price for your auto insurance, but it’s a good tradeoff.”

Someone asked about reinsurance. Buffett said the business is not as good as it used to be because of all the asset managers setting up shop in Bermuda pretending they’re interested in reinsurance. “It’s a beard for asset management . . . it’s a business whose prospects have turned for the worse.”

Munger: “We’re playing the game for the long haul, and other people are just pretending to.”

A seventh-grader asked how to make a lot of friends and get people to work with you.

Munger: “I was obnoxious when I was your age . . . The only way I could get people to like me was to get very rich and very generous.”

Buffett advised him to emulate qualities he likes in others — be friendly, don’t take credit for stuff you don’t do, etc. If you don’t like traits in others, get rid of them in yourself.

Buffett repeated that Munger has said when looking for a marriage partner, don’t look for intelligence, humor or character. Look for low expectations.

There was a question about labor unrest at NetJets, which produced a picket line of pilots outside the Century Link Center all day. Buffett discussed it only generally, saying NetJets is a good business and he likes all its pilots that he knows. Differences over contract terms are going to happen, he said. “We have no anti-union agenda whatsoever . . . It’s perfectly understandable that employees and employers will have differences from time to time . . . At the moment, we’ve got a difference of opinion about a contract.”

Munger: “I’m not at all sure the union is fairly representing the pilots.”

Editorial aside: There were a lot of pilots outside carrying picket signs all day.

There was a question about Duracell and whether tax considerations were the key factor in buying a company whose core business — alkaline batteries — is in decline. Buffett said it’s declining, but it will be a good business for years to come. He didn’t even mention Ben Graham.

There was a question about philanthropy which Buffett answered in the usual way. Stock certificates in a safe deposit box do him no good, could do others in need a lot of good. “There’s no Forbes 400 in the graveyard.”

Munger praised a recent revision in the estate tax rules. “I don’t think we should assume that our politicians are always going to be totally crazy.”

There was a question about whether Berkshire Hathaway should do with appreciated securities what Yahoo did with its Alibaba stake. The answer was no.

There was a question about household formation, which Buffett predicted would rebound with the economy but hasn’t yet. Buffett suggested it still will.

Munger: “I have some grandchildren that I wish would marry somebody suitable promptly . . . They should quit looking for pie in the sky or whatever the hell they’re doing.”

There was a question about how to get corporations to do more for people in need who aren’t shareholders. Buffett said he’s more comfortable giving away his own money than that of shareholders. “I don’t feel it’s my money. I really look at this as a partnership.”

Munger: “I don’t have the faintest idea . . . It’s a flawed system in some ways to put countries that are so different together.”

And the money quote: “You can’t form a business partnership with your shiftless, drunken brother-in-law.”

Buffett: “Everything here is off the record.”

They agreed the U.S. and Canada could have shared a currency, but all the countries of the Western Hemisphere could not. Buffett mentioned Venezuela and Munger mentioned Argentina almost simultaneously.

Someone asked if there are synergies to be had between Geico and Van Tuyl, maybe selling insurance with the cars. “I don’t think so,” Buffett said. Historically, selling insurance through dealerships hasn’t worked well, and adding all those people would hurt Geico’s low-cost model.

Munger: “I agree it’s a very dumb idea and we’re not going to do it.”

Somebody asked if Buffett sees value in silver. Buffett said they owned 100 million ounces at one time. “I haven’t paid much attention to it for a long, long time.”

Munger: “It’s a very good thing, too.”

Buffett: “We came out better than the Hunt brothers, but we don’t think about it much anymore.”

Somebody prefaced a question by saying, “Warren and Charlie won’t be around forever.”

Buffett interjected: “I reject such defeatism!”

The question was about breaking up Berkshire. The answer was no. Luckily, Buffett said, Berkshire Hathaway will be too big for activists to do much about. “We should be a place where people can dump their activists.”

There was a question about American Express and how it defends its moat with all the technological innovation in payment systems. Buffett said there’s still a lot of loyalty in Amex customers.

Munger: “I liked it a little better when they had a little less competition, but that’s life.”

There was a question about using more leverage. Munger: “We haven’t felt capital-constrained for a long time. It’s a problem we’d love to have.”

There was a question about the lack of economies of scale in auto dealerships in China. Buffett said he didn’t know the situation in China, but he doesn’t expect big benefits of scale in auto dealerships in the U.S., either.

Another Chinese questioner wanted help with his career: “What’s your secret?”

I chose that moment to book and beat the crowd to the parking lot. Had to dodge the most polite picket line in history. “Excuse me,” said one of the pilots when we almost collided. “Oh, no, excuse me,” I said. I tell ya, these labor disputes ain’t what they used to be.